The cap on interest rates for student loans is being cut to 6.3% from September.
It was due to rise to 7.3% after the Institute for Fiscal Studies (IFS) warned students could end up paying up to 12% interest.
READ MORE: What happens if you don't pay your energy bills as campaign rallies support
The change affects anyone who is repaying a Plan 2 (undergraduate) or Plan 3 (postgraduate) loan, reports the Mirror.
The interest rate on student loans is currently set at 4.5% and is calculated by adding 3% to the Retail Price Index (RPI).
You’ll be on a Plan 2 repayment plan if you started an undergraduate course anywhere in the UK on or after September 2012.
The Department for Education (DfE) says its announcement today means graduates and current students will save hundreds of pounds each year.
It gives the example of a borrower with a student loan balance of £45,000.
The Government claims this person would reduce their accumulating interest by around £210 per month, compared to 12% interest rates.
This is on the total value of the loan, as monthly repayments do not change - only the interest rate.
However, the IFS has warned that the new lower cap still does "nothing at all to protect current students".
Ben Waltmann, senior research economist at the IFS, told the BBC : "Only the minority of, mostly high-earning, graduates set to pay off their loans in full will ever actually benefit from this.
"Importantly, this does nothing at all to protect current students from the rising cost of living."
Monthly student loan repayments are calculated by income rather than interest rates or the amount borrowed.
You will usually start repaying your loan at the start of the tax year after you finish or leave your course - but only once you start if you earn over the “repayment threshold”.
A spokesperson for the Student Loans Company said: “The change in interest rates is automatically applied so customers don’t need to take any action.
“We encourage customers to use SLC’s online repayment service to regularly check their loan balance and repayment information, as well as ensure their contact information is up-to-date.”
READ NEXT –
Argos shoppers race to get 'bargain' pool ahead of 'UK heatwave'
Glasgow drivers issued urgent sunglasses warning or risk £5,000 fine
Experts warn motorists of new 2022 UK driving rules which could affect them
Martin Lewis warns of mobile roaming mistake that could cost you £6 a day
Scottish drivers urged to 'give evidence' following HGV driving licence changes
